Wednesday, January 9, 2013

National Taxpayer Advocate Nina E. Olson today released her
2012 annual report to Congress, identifying the need for tax reform as the
overriding priority in tax administration.

TAX REFORM

The National Taxpayer Advocate’s annual report designates the complexity of
the tax code as the #1 most serious problem facing taxpayers and recommends
that Congress take significant steps to simplify it. “The existing tax code
makes compliance difficult, requiring taxpayers to devote excessive time to
preparing and filing their returns,” Olson wrote. “It obscures comprehension,
leaving many taxpayers unaware how their taxes are computed and what rate of
tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers
to reduce their tax liabilities and provides criminals with opportunities to
commit tax fraud; and it undermines trust in the system by creating an
impression that many taxpayers are not compliant, thereby reducing the
incentives that honest taxpayers feel to comply.”

TAX-RELATED IDENTITY THEFT

The number of tax-related identity theft incidents has increased
substantially in recent years. Within TAS, identity theft case receipts
increased by more than 650 percent from FY 2008 to FY 2012. At the end of FY
2012, the IRS had almost 650,000 identity-theft cases in its inventory
servicewide. The problem has grown worse as organized criminal actors have
found ways to steal the Social Security numbers (SSNs) of taxpayers, file tax
returns using those taxpayers’ names and SSNs, and obtain fraudulent tax refunds.
Then, when the real taxpayer files a return claiming the refund, that return is
rejected. The impact on victims is significant. More than 75 percent of
taxpayers filing returns are due refunds, which average some $3,000 and are not
paid until the IRS fully resolves a case.

OTHER KEY ISSUES ADDRESSED

Federal law requires the Advocate’s Annual Report to Congress to identify at
least 20 of the “most serious problems” encountered by taxpayers and make
administrative and legislative recommendations to mitigate those problems.
Among the “most serious problems" addressed are the following:

The IRS’s Offshore Voluntary Disclosure programs and their failure to distinguish adequately between “bad actors” and “benign actors.” The IRS has sought to increase enforcement of Foreign Bank and Financial Accounts (FBAR) reporting requirements in recent years and has offered a series of voluntary disclosure programs designed to settle with taxpayers who had failed to file required FBAR forms. However, the report says, the programs generally applied a “one-size-fits-all” approach that required the payment of significant penalties and did not distinguish between “bad actors” and “benign actors.” By generally requiring taxpayers who make voluntary disclosures to “opt out” of the disclosure program and submit to comprehensive audits in order to avoid draconian penalties, the report argues that the program has caused excessive burden and fear for taxpayers who had reasonable cause for not filing FBAR forms or whose failure to file was inadvertent.

The IRS’s failure to
provide tax refunds to victims of preparer fraud. When a taxpayer is
victimized by a preparer who receives a fraudulent refund by paper check,
the IRS will issue a replacement refund to the taxpayer. However, the IRS
will not issue a replacement refund when a taxpayer is victimized by a
preparer who receives the fraudulent refund by altering the bank routing
number on a direct-deposit request, even though the IRS has received legal
advice that it may do so. Olson says the taxpayer-victim is legally
entitled to receive the refund, and the IRS has no legal basis for
withholding it.

The IRS’s
extraordinarily high audit rate of taxpayers who claim the adoption tax
credit. Congress
created the adoption tax credit to help low and middle income families
afford the costs of an adoption, which are estimated to run as high as
$40,000. Yet the IRS, partly using income-based rules, selected 69 percent
of tax returns claiming the credit during the 2012 filing season for
audit, compared with one percent of returns overall. These audits imposed
significant burden on the affected taxpayers for several reasons, most
notably because the median refund claim constituted nearly one-quarter of
the taxpayers’ adjusted gross income for the year, and the audits on
average took over four months. Despite the burden, the payoff was
relatively small. The IRS denied only about 10 percent of the amounts
claimed in tax year 2010, and as of mid-November had denied only about 1.5
percent of the amounts claimed in tax year 2011. The excessive focus on
returns claiming the adoption credit burdened many taxpayers and could have the effect of negating Congress’s intent to encourage adoptions,
the report says.

2 comments:

Pleased to see that the NTA listed again for 2012 the offshore compliance complexity issues in MSP 8 and MSP 15, although, of course, it will not be mentioned in the media like this story at the New York Times....

One of the major complaints of the 2011 OVDI was that penalty presumed willfulness; which is the government's burden to prove.

The 2012 OVDP addressed this issue in FAQ 51.1 which provides that benign taxpayers who have reasonable cause for their failure to file certain tax returns may first applying to the OVDP program and subsequently opting out of the civil settlement structure.

One of the Taxpayer’s Advocate criticisms of IRS's handling of offshore voluntary disclosures is that it requires Taxpayers to opt in the program then opt out of the program. According to this report; this opt in to later opt out causes extended resolution times over smaller amounts, when compared to traditional offshore voluntary disclosure participants

The average time to resolve OVDP submissions for taxpayers who elected to remain within the program's civil settlement structure was about 300 days. For participants who opted for the path envisaged under FAQ 51.1, the average resolution time was approximately 550 days.